RESEARCH
Publications
The Unintended Consequences of Employer Credit Check Bans on Labor Markets (with Andrew Glover and Murat Tasci)
Review of Economics and Statistics, Forthcoming.
Over the last decade, eleven states have restricted employers’ access to the credit reports of job applicants. We document a significant decline in county-level vacancies after these laws are enacted – job postings fall by 5.5 percent in affected occupations relative to exempt occupations in the same county and the same occupation nationwide. Cross-sectional heterogeneity in our estimates suggests that employers use credit reports as signals: vacancies fall more in counties with a large share of subprime residents, while they fall less in occupations with other commonly available signals.
Stress Tests and Small Business Lending (with Yuliya Demyanyk, Lei Li, Elena Loutskina and Philip E. Strahan)
Journal of Financial Economics, vol. 136, no. 1 (April 2020):260-279.
Post-crisis stress tests have altered banks’ credit supply to small business. Banks most affected by stress tests reallocate credit away from riskier markets and toward safer ones. They also raise interest rates on small loans. Quantities fall most in high-risk markets where stress-tested banks own no branches, and prices rise mainly where they do. The results suggest that banks price the stress-test induced increase in capital requirements where they have local knowledge, and exit where they do not. Stress tests do not, however, reduce aggregate credit. Small banks seem to increase their share in geographies formerly reliant on stress-tested lenders.
Tracing Out Capital Flows: How Financially Integrated Banks Respond to Natural Disasters (with Philip E. Strahan)
Journal of Financial Economics, vol. 125, no.1 (July 2017):182-199.
Multi-market banks reallocate capital when local credit demand increases after natural disasters. Following such events, credit in unaffected but connected markets declines by about 50 cents per dollar of additional lending in shocked areas, but most of the decline comes from loans in areas where banks do not own branches. Moreover, banks increase sales of more-liquid loans in order to lessen the impact of the demand shock on credit supply. Larger, multi-market banks appear better able than smaller ones to shield credit supplied to their core markets (those with branches) by aggressively cutting back lending outside those markets.
Clouded Judgment: The Role of Sentiment in Credit Origination (with Ran Duchin and Denis Sosyura)
Journal of Financial Economics, vol. 121, no. 2 (August 2016): 392–413.
Using daily fluctuations in local sunshine as an instrument for sentiment, we study its effect on day-to-day decisions of lower-level financial officers. Positive sentiment is associated with higher credit approvals, and negative sentiment has the opposite effect of a larger magnitude. These effects are stronger when financial decisions require more discretion, when reviews are less automated, and when capital constraints are less binding. The variation in approval rates affects ex-post financial performance and produces significant real effects. Our analysis of the economic channels suggests that sentiment influences managers' risk tolerance and subjective judgment.
Bridging the Gap? Government Subsidized Lending and Access to Capital (with Josh Lerner)
Review of Corporate Finance Studies, vol. 2, no. 1 (March 2013): 98–128.
The consequences of providing public funds to financial institutions remain controversial. We examine the Community Development Financial Institution (CDFI) Fund’s impact on credit union activity, using hitherto little studied U.S. Treasury data. The CDFI Fund grants increase lending at credit unions by 3%. For every dollar awarded, 45 additional cents are loaned out to borrowers in the first year, and up to an additional $1.60 is loaned out within three years. Delinquent loan rates also increase slightly. Our panel results are supported by a broadband regression discontinuity analysis. Politics does not seem to play a role in allocating funding.
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Working Papers
How Perception Affects House Prices: Evidence from Failed Auctions (with Mandeep Singh, David H. Solomon & Philip E. Strahan)
In Australian real estate markets, about a third of properties are sold at auction. We show that properties that fail auctions sell later for a 1.2% discount. This effect increases for properties failing multiple auctions and when no bids are made. Consistent with a causal channel, the effect holds using repeat sales with property-level fixed effects and when auction failure is instrumented by owners’ tendency to anchor on nearby better properties (thus setting reserve prices too high). Prices cluster just below salient round numbers, and the discount fades over time, inconsistent with our effects reflecting unobserved property characteristics. We test for several mechanisms and conclude that most of the pricing discount reflects stigma, which reduces potential buyers’ willingness to pay.
Informational Advantages of Lending Locally
Banks decreased loan originations and retention in response to high home price appreciation during the run-up to the housing crisis when lending locally. This relationship holds even after addressing branch network endogeneity using historical branch networks and M&A activity as instrumental variables. For every 1 percent increase in home prices from 2002 to 2006, banks originated two fewer loans locally. Loans sold to Freddie Mac from banks with a local presence defaulted more, demonstrating superior knowledge on the part of the banks and exploring a new channel for adverse selection. Banks exited precisely the markets that experience price reversals.
Rebuilding After Disaster Strikes: How Local Lenders Aid in the Recovery
I document the benefits of access to local finance for new and small firms using detailed employment data on firm age and size. I use natural disasters and regulatory guidance to disentangle the effects of credit supply and demand. I find that an additional standard deviation of local finance offsets the negative effects of the disaster and can lead to 1 to 2% higher employment growth. I show that local lenders increase lending but are not borrowing against future lending. The findings suggest that local lenders play an important and necessary role in job creation in the economy.